How Does Dropbox Make Money?

By Markets Fool.com


Image source: Dropbox.

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In the mythic world of tech lore, unicorns are indeed rarely seen creatures. However, if a unicorn is uncommon, a "decacorn"-- a start-up valued at over $10 billion -- is the rarest of the rare.

According to The Wall Street Journal, only 12 such beasts exist today.

Most recently valued at a cool $10 billion valuation, despite some pressure on its share price, cloud storage companyDropbox has recently faced mounting competition from a cadre of big tech powers including Apple Alphabet , Microsoft, and others.

With many tech investors hoping for a Dropbox IPO, let's quickly review how Dropbox generates revenue for its investors.

How does Dropbox make money?

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Dropbox employs a so-called "freemium" business model,meaning it gives the basic version of its product away at no cost in hopes users will upgrade to more feature-rich versions, for which it charges subscription fees.

For example, Dropbox's Basic product costs nothing but offers users only 2 GB of storage and a handful of features, including its industry-leading file synching technology, encryption, and Office integration. Dropbox's paid tiers cost $9.99/month for the individual version of its Pro edition and $15/month per user for its Business edition. Lastly, Dropbox's Enterprise edition is priced on a company-specific basis. As you should expect, Dropbox adds more features and customer support with each paid tier.

This model has powered rapid user growth and sales growth for Dropbox. Though 2016 sales target figures prove illusory, 2015 data reportedly pegged Dropbox's active users at over 300 million, while its annual sales run rate reportedly eclipsed $400 million.

Though certainly impressive, the chasm between Dropbox's $10 billion valuation and its recent revenue levels has also fueled many media posts questioning the company's valuation. Helping further these claims, a number of large mutual funds have recently marked down their internal stock prices for Dropbox. Worse yet, some technology writers have speculated that rising competition from the likes of Apple, Alphabet, Amazon, and others could make Dropbox the first "decacorn" to go out of business.

Can Dropbox overcome the competition?

Dropbox famously rebuffed a nine-figure acquisition offer from Apple CEO Steve Jobs in 2011. At the meeting between Jobs and Dropbox co-founder and CEO Drew Houston, Jobs cautioned Houston's decision to remain independent when he claimed Dropbox is "a feature, not a product."Given how many big tech names have launched competing products -- and the success they've seen -- it appears Jobs might have been onto something.

Both Apple and Alphabet have made significant improvements to their respective consumer cloud storage products in recent years, and on the enterprise side, Alphabet, Microsoft, Box, and others are each competing with one another for corporate users. As Forrester Research analyst Michael Facemire said in an interview withUSA TODAY, "I'm a little bit concerned about all the (storage) players."

Dropbox CEO Houston has saved face by sketching out a broad vision for the company, saying, "In a world of unicorns, we're trying to build a business ... In the beginning, we built storage.But as it evolves, our product becomes a platform for collaboration, for the sharing of data among people, teams and industries." As others have noted, this sounds great in theory.

However, Houston's lofty statements have yet to materialize into tangible products. This leaves Dropbox with a core product that today clearly represents the new norm for file collaboration for individuals and enterprises. However, with newer offerings like Slack touching on aspects of workplace collaboration, like communication, the road forward for Dropbox seems fraught with risk. As such, Dropbox's current business model and product offerings may need to evolve in order for the company to make good on its $10 billion valuation.

The article How Does Dropbox Make Money? originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon.com, and Apple. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.